Bechtel Corporation

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Bechtel Corporation

  1. 1. Bechtel Corporation E-Procurement Analysis: Engineering and Construction Industries Written by Beatrice Benne Suzy Jacoby Jessica Lindl Mitch Posada Cases in Electronic Commerce – E/BA296-2 Professors Arie Segev & J. Leon Zhao April 1999 UC Berkeley, Haas School of Business
  2. 2. E-Procurement Analysis: Engineering and Construction Industries Team Members Beatrice Benne* bbenne@socrates.berkeley.edu or bcbenne@bechtel.com Susy Jacoby jacoby@haas.berkeley.edu Jessica Lindl lindl@haas.berkeley.edu Mitch Posada posada@haas.berkeley.edu *team leader Project Summary Engineering and Construction (E&C) industries provide engineering, procurement, construction, and construction management services for engineering/construction projects around the world. The total market accounts for more than several hundred billion dollars in revenue each year. E&C companies generally spend between 60 to 80 percent of their revenues on equipment, material, and services. Indirect and direct material procurement, therefore, is an extremely important part of business and can differentiate companies from competitors due to cost advantages. Bechtel, one of the leading engineering and construction companies, is interested in learning how the company can take advantage of web procurement to improve internal process efficiency, achieve delivery reliability and product quality, and lower costs. Bechtel’s procurement organization is currently revisiting its e-commerce “strategy.” The company has engaged our team to conduct research on the current state of e-commerce for the E&C industry and to analyze how an E&C company such as Bechtel can integrate e-commerce into its current operations. Roughly 80% of Bechtel’s procurement volume entail “minor bulks and consumables,” which include relatively inexpensive, common tools such as hammers, hard hats, gloves, etc. This type of procurement tends to be high volume, time-intensive and homogeneous. In addition, minor bulks and consumables tend to be common “off-the-shelf” products that require relatively little analysis and strategy in selecting a source. Due to these characteristics, Bechtel believes this area represents the greatest opportunity for web procurement, thus this will be the focus of our project. 2
  3. 3. Table of Contents 1 Introduction 1.1 Company Profile 1.2 Project background 1.3 Project objectives 1.4 Project deliverables 2 Preliminary Investigation 2.1 Names and coordinates of contact persons 2.2 Method of project investigation 2.3 Next steps of investigation 3 Summary of Project Progress 3.1 Project schedule and milestones 3.2 Critical success factors/Anticipation of difficulties 3.3 Workload among group members by owner 3
  4. 4. 1. Introduction 1.1 Company Profile For more than a century, Bechtel has mastered many kinds of projects from engineering, procurement, construction, management, development, and financing. The various service and business clients include civil engineering; community relations; defense and space; development, financing, and ownership; environmental; industrial; mining and metals; offshore; petroleum and chemical; pipeline; power; technology and consulting; telecommunications; water; and contract maintenance. The company has worked on more than 19,000 projects in 140 nations on all seven continents. Bechtel' s worldwide network of knowledge and talent has evolved into regional organizations, directly accountable to the local customers they serve. Bechtel’s global presence includes offices located in Asia Pacific, Europe, Africa, Middle East and Southwest Asia, Latin America, and North America. 1.2 Project background Current State of Procurement System Through the years, Bechtel Procurement has developed products and services to support and enhance the acquisition process. Bechtel is currently replacing its “old” Procurement Tracking System (PTS) by Bechtel Procurement System (BPS), which links Bechtel’s procurement activities worldwide while integrating closely with Engineering, Project Controls, Construction, and Accounts Payable for each project. BPS automates administration of global planning and sourcing, multi-project agreements (see details next paragraph), supplier performance evaluation, bid list and bid package preparation, material delivery expediting, shipment tracking, and job-site warehouse management functions. BPS supports Bechtel’s Global Supply Chain Strategy initiatives and systems integration with suppliers. BPS is being integrated with other Bechtel applications such as CAD and discipline-specific tools. The system is currently being released on a worldwide scale to support Bechtel’s projects. Bechtel uses Dun & Bradstreet to find out information about supplier qualification and analysis, and lists for sourcing suppliers worldwide. The company has developed an internal catalog system, which describes the list of parts with up to 250 attributes and their stock codes. In addition, Bechtel uses Electronic Data Interchanges (EDI) to electronically transmit purchase order to some of the suppliers. Figure 1 shows the different links that exist between Engineering CAD tools, Bechtel products catalog (stock codes), and the link with the supplier through the Multi-Project agreements (MPA). 4
  5. 5. Get codes for CAD from Bechtel Bechtel Catalogue CAD Catalogue. (Stock codes, list of parts, 250 attributes) Look at structure, bring it down Definition of the BOM must be driven and come up with BOM. by what is on the catalogue. Electrical Piping Engineering Quantity MPA Material Supplier (Item Stock code, price) Systems Procurement PO Suppliers Purchasing Pricing vs.Availability RFQs Bid Fig.1 – Supply Chain Management Supply Chain Strategy To decrease project cost and to shorten cycle time, Bechtel has developed and implemented a Supply Chain Strategy. This strategy subdivides construction commodities into four main categories having different transaction value and transaction volume. Figure 2 shows the different commodities and their hierarchy. For the materials from categories III and IV, Bechtel has developed Multi-Project Acquisition (MPA) agreements, which leverage Bechtel’s purchasing power through long- term price agreements with traditional suppliers. Examples of materials with MPAs are fabricated steel, fabricated piping, instrumentation, and bulk materials. Bechtel has also developed Protocol Agreements, which are agreements designed to facilitate rapid pricing, work process integration, and use of predetermined terms and conditions. Example of products subject to Protocol agreements are shell and tube heat exchangers (e.g. pressure vessel, process columns, pumps). 5
  6. 6. I. Strategic Alliance Critical to what Bechtel does. Reference Based Collaboration Vendor Publishes and Provides. Engineered Equipment II. Competitive Bids Design based collaboration. I. Custom Built Solutions. Transaction Custom Built to Order. Transaction Value Value Fabrication III. Priced Agreements II. Price/Spec Interface. Industry based standardization. Standard Materials and Standard Materials Major Bulks IV. Buy Local III. Routine materials (gloves, etc.) MRO Purchasing Minor Bulks and Consumables High level of standardization. IV. Transaction Transaction Volume Volume Fig. 2 – Material Purchasing Strategies The most viable area for web procurement today is for purchases of unit priced standardized/ stock bulk materials. Not surprisingly, 60%-80% of Bechtel’s procurement volume come from Category IV, “minor bulks and consumables.” Procurement in this area tends to be less expensive purchases, less complex products and stability of sourcing due to already- established partners (see Figure 3). Due to the high volume, time-intensity of purchasing, and homogeneity of this type of product, this category represents the largest opportunity for increasing efficiency, improving quality and delivery, and reducing costs. Price I Competitive bid II Protocol agreements but no price agreements III Case Specific IV Industry Specific Complexity of the product Stability of the market (from Supplier stand point) Fig 3 – E-commerce Strategies 6
  7. 7. For many products from category IV, some products from category III and MRO types of commodities, Bechtel's supply chain strategy is to purchase standardized/stock bulk materials from local vendors -- driven by both economic/political factors (statement of policy) -- for these reasons: • Buying locally tends to be cheaper because of limited transportation costs • Products are readily available worldwide and don’t require engineering design • Clients require Bechtel to buy locally due to established relationships with local vendors • Buying locally is a good-will gesture to the country in which they are conducting business For such local market purchases, Bechtel is often only a short-term customer. There are three challenges for implementing a web-based procurement strategy for these types of arrangements: • What is the motivation for a supplier to engage in e-commerce with Bechtel as a local, short-term (usually 2-5 years) customer only? • What is a cost-effective approach for Bechtel if presently each project must establish its own e-commerce suppliers from the local market? • Is the current state of e-commerce mature enough to cost effectively support a global corporate vagabond like Bechtel? 1.3 Project objectives This project aims to: • Identify the current utilization of web-based procurement by companies in the E&C industries. • Determine the e-commerce readiness of suppliers of Category IV-type products in the E&C industries. • Identify any industry-wide e-commerce initiatives, such as third-party intermediaries and outsourcing vendors. • Based on our findings, describe the best infomediary for the industry. • Based on our findings, make recommendations on the best business model for web-based procurement for this industry. • Understand the financial burden Bechtel bears as a result of purchasing the products manually rather than through electronic commerce and a negotiated agreement, and possible ROI. 1.4 Project deliverables • Study of five identified products and how suppliers for these product categories are currently using e-commerce for U.S.-based projects. 7
  8. 8. • Study of industry intermediaries and information sources for e-commerce for E&C companies. We suspect there are few, if any, of these companies. If this is the case, we will develop our idea of a perfect infomediary for this industry. • An e-commerce capabilities survey directed to potential suppliers that will be used later by Bechtel in other regions to evaluate the readiness of other local markets. • A complete report to be submitted in writing and via a verbal presentation to client contacts at Bechtel. 2. Preliminary Investigation 2.1 Names and coordinates of contact persons 1. Charlie Frech Manager Procurement Systems -Support/Materials Management cfrech@bechtel.com 2. Jim Dilworth Manager of Procurement Systems jdilwort@bechtel.com 3. Vipin Chawla Project Systems Manager Vchawla@bechtel.com 2.2 Method of project investigation To date, we have met with members from Bechtel twice to determine their electronic commerce needs and objectives. • February: Met with Charlie Frech (Manager Procurement Systems -Support/Materials Management) at Bechtel offices to better understand Bechtel’s procurement strategies and business challenges. • March: Met with Jim Dilworth: Manager of Procurement Systems to learn about existing procurement systems and to discuss parameters and scope of the project. Based on our meetings, we have an in-depth understanding of the current state of electronic commerce within the firm and a vision of where they would like to be in twelve months. Again, the largest obstacle the firm faces is the inability to purchase level III and IV products locally. The firm demands local purchase of these products because of exchange-rate advantages, economies of scale and positive relationships with the international firms that hire Bechtel. Few electronic commerce firms operate internationally or will agree to create such an information-intensive catalogue for the specific firms Bechtel works with in these procurement markets. 8
  9. 9. The next steps of our investigation will revolve around Internet, individual and intermediary research. We will search the web to determine if any suppliers in the products specified (i.e. plumbing, electric, etc.) already have services in place. We will look at how other industry players are using e-commerce for procurement. We will also research electronic commerce companies to see if they offer services that may have been overlooked by Bechtel’s previous research. Finally, we will conduct phone interviews to determine the availability of such a solution. 2.3 Next steps of investigation Our next steps to determine the feasibility of this project will focus on a subset of Bechtel’s procurement based on a few key high-volume products and suppliers. We are currently working with Bechtel to identify a list of approximately five products to investigate, such as gloves, pipes, hardhats, and hammers. For each of these products, we will determine how suppliers are using e-commerce both directly with companies as well as through possible intermediaries. This sample of products will provide a pilot study for analyzing web procurement. Furthermore, since Bechtel’s procurement strategy requires looking at each local market, we will first focus on the viability of web-based procurement for U.S.-based projects. Per Bechtel’s direction, the U.S. represents a large portion of their business and they believe U.S. suppliers are further along the e-commerce readiness curve. We believe this is a realistic scope for our given timeframe and we believe our process of analysis can then be applied to other geographical markets as Bechtel wishes to continue the investigation. 3. Summary of Project Progress 3.1 Schedule and Milestones April 5-9: Identify Product Focus Areas and Suppliers Write supplier interview questions Begin research on five identified product areas Begin researching how other industry players are using e-commerce Begin researching intermediaries and industry-specific web sites April 12-16: Complete all research by end of week Meet with Bechtel to discuss findings and determine any additional research required April 19-23: Perform analysis and determine recommendations April 26-30: Write final report and prepare presentation 9
  10. 10. 3.2 Critical success factors/Anticipation of difficulties • Access and responsiveness of Bechtel contacts • Access and responsiveness of selected Bechtel suppliers • Lack of information about industry via web sources due to confidentiality of information 3.3 Workload among group members by owner of activity Beatrice: Five-product analysis and supplier interviews to determine supplier readiness Suzy and Mitch: Intermediaries and Outsourcing/Developing ideal Infomediary Jessica: Research other E&C company e-commerce strategies/ROI 10

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